How well do you know the requirements for banks to use the Internal Ratings-Base...

Study Notes

In order to use the IRB approach, a bank must demonstrate to its supervisor that it meets certain minimum requirements both initially and on an ongoing basis. These requirements focus on the bank's ability to rank and quantify risk in a consistent, reliable, and valid manner. The requirements aim to ensure that the bank's rating and risk estimation systems and processes provide a meaningful assessment of borrower and transaction characteristics, a meaningful differentiation of risk, and reasonably accurate and consistent quantitative estimates of risk.

While the Committee recognizes that differences in markets, rating methodologies, banking products, and practices require banks and supervisors to customize their operational procedures, the minimum requirements set out in this chapter apply to all asset classes unless noted otherwise. Banks must produce their own estimates of probability of default (PD) and adhere to the overall requirements for rating system design, operations, controls, and corporate governance, as well as the requisite requirements for estimation and validation of PD measures.

Banks are not required to produce their own estimates of PD for certain equity exposures and certain exposures that fall within the specialized lending sub-class. If a bank is not in complete compliance with all the minimum requirements, it must produce a plan for a timely return to compliance or demonstrate that the effect of such non-compliance is immaterial in terms of the risk posed to the institution.

The term "rating system" comprises all of the methods, processes, controls, and data collection and IT systems that support the assessment of credit risk, the assignment of internal risk ratings, and the quantification of default and loss estimates. A qualifying IRB rating system must have two separate and distinct dimensions: the risk of borrower default and transaction-specific factors. If a bank uses multiple rating systems, it must document the rationale for assigning a borrower to a rating system and demonstrate that each system used for IRB purposes is in compliance with the minimum requirements.

Description

Test your knowledge on the minimum requirements for banks to use the Internal Ratings-Based Approach (IRB) for risk assessment. This quiz will cover the necessary components of a qualifying IRB rating system, including borrower default risk, transaction-specific factors, and the estimation and validation of probability of default (PD) measures. Learn about the requirements for rating system design, operations, controls, and corporate governance, and gain a deeper understanding of the differences in markets, rating methodologies, banking products, and practices that may